Model N Inc (MODN) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Model N Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Staci Mortenson, Investor Relations. Thank you. You may begin.

Good afternoon. Welcome to the earnings result call for Model N's second quarter fiscal year 2017, which ended on March 31, 2017. With me today are Zack Rinat, Founder, Executive Chairman and Chief Executive Officer; and Mark Tisdel, Model N's current Chief Financial Officer; and David Barter, Model N's new Chief Financial Officer.

A press release was issued after the close of market and is posted on our website, where this call is being simultaneously webcast. The primary purpose of today's call is to provide you information regarding our second quarter fiscal year 2017 performance and our financial outlook for our third quarter and full year fiscal 2017.

Commentary made on this call may include forward-looking statements. These statements are subject to risks, uncertainties and assumptions. Please refer to the press release and the risk factors in documents filed with the Securities and Exchange Commission, including our annual report on Form 10-K and our quarterly reports on Form 10-Q for information on risks and uncertainties. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, actual company results could differ materially from those forward-looking statements.

In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, GAAP results. I encourage you to visit our Investor Relations website at investor.modeln.com to access our second quarter fiscal year '17 press release, periodic SEC reports and the webcast replay of this call.

Finally, unless otherwise stated, all financial comparisons in this call will be to our results for the comparable period of our fiscal year '16.

With that, let me turn the call over to Zack.

And good afternoon, and thank you for joining us today. I will start the call today discussing progress against our strategy for fiscal year '17 and beyond, progress on the Revitas acquisition and Q2 fiscal year '17 highlights. Mark Tisdel, our CFO, will follow me with the financial results. I will end my section of the call discussing the appointment of David Barter as our new CFO and the appointment of Baljit Dail to our board.

Model N executed extremely well in Q2 fiscal year '17, exceeding our guidance on both the top and bottom lines. Q2 fiscal year '17 marked 3 important milestones for Model N: first, we closed the Revitas acquisition on January 5, 2017, and now we've closed our first quarter performance as a combined company.

Second, it is the consecutive well-executed quarter and was the strongest first half for revenue in Model N's history. Third, we had record-breaking attendance at our Annual User Conference, Rainmaker.

As we discussed in previous calls, the acquisition of Revitas created a unique strategic opportunity for Model N. We have developed and are laser-focused on executing our integration strategy to deliver both financial and operational results. We are committed to making the acquisition a success for both our customers and our shareholders.

The life sciences industry is at an inflection point where Revenue Management is crystallizing as a strategic imperative. Driving top line profitable growth is the #1 priority of most life sciences companies. At the same time, this company exists to comply with and adapt to an unprecedented and evolving global climate of regulations as governments, both in the U.S. and globally, try to optimize their health care spending.

Governments and other health care providers are demanding price transparency and seek transition from traditional consumption-based pricing to new models such as outcome-based pricing. Finally, companies are looking for optionality to both acquire and divest in an M&A-centric industry. The focus of the new administration on cutting drug prices and enhancing regulatory compliance is a strong testament to this inflection point as well as the need for further innovation in Revenue Management.

The industry is seeking a technology partner to leverage technologies such as cloud, SaaS, mobile, social and big data to capitalize on their strategic opportunities and overcome their challenges. Model N is now even a stronger Revenue Management partner for the life sciences industry at this critical moment.

We closed the Revitas acquisition on January 5 and started the first wave of cost synergies on the same day. We eliminated duplicated G&A sales and marketing activities as well as redundant products outside the life sciences vertical. We made reduction from both Revitas and Model N employees. We continued to execute the cost optimization plan throughout Q2 fiscal year '17 and feel that we have exited this process with a very strong unified team and much stronger company.

Our main focus was on our customers to ensure our strategy and execution priorities are aligned with theirs. We created [RainmakerI], which is an integration strategy board to communicate our strategy, receive feedback and align our integration priorities with the needs of our customers.

Since we announced the acquisition, we have had 3 in-person RainmakerI sessions, with the last one being held just 2 weeks ago as part of our Annual User Conference, Rainmaker. RainmakerI was very well received by our customers and had representation from companies such as J&J, Novartis, Pfizer, Merck, GSK and Allergan, among others.

Customers are excited about both our short-term and long-term direction for revenue cloud and Revenue Management as a Service or RMS. In particular, Revitas customers are excited about taking the Revitas product to the cloud and offering this product through RMS. Customers' excitement about and alignment with Model N direction was evidenced by our successful annual user conference, Rainmaker, which was held at the end of April.

Rainmaker 2017 broke records across the board in terms of attendance, number of companies, numbers of sponsors and sponsorships. Rainmaker 2017 was held just a few days after we released our spring '17 products across all our products, including the former Revitas products.

As part of our integration strategy, we unified the engineering processes and product release schedule and now released the entire product line on a single date. The product team did an excellent job in delivering the spring release on time with this committed internally for high tech, emerging vertical and for life sciences, both ex-Revitas and Model N products. In particular, we made all previous Revitas products, road map, plans and new features.

Rainmaker provided us with a timely opportunity to demonstrate our strategic progress, our execution to the plan and further align with our customers. During my keynote, we visualized our progress with 2 onstage live demos. The first was Revenue Management as a Service for our revenue cloud, powered by Model N.

During this demo, we upgraded the customers in production in less than 1 hour from the winter '16 release to the Revenue Cloud spring '17 release. The second was RMS for our revenue cloud spring '17, powered by Flex, which was the ex-Revitas product.

Before starting the demo, we surveyed the audience. And one of the ex-Revitas customers told the audience that he believes that it would take roughly 6 months in his company to provision a new instance of the product. We demonstrated a provisioning of the revenue cloud powered by Flex spring '17 release in approximately 25 minutes. While every customer system needs are unique, the dramatic difference between minutes versus months is a testament to the transformational power of Model N revenue cloud.

In addition, we've demonstrated new capabilities of the product, and in particular, the homogenized new user interface. Our progress was further evidenced by the Revenue Management award that was given during the keynote to 8 customers: AstraZeneca, Intel, Novartis, Astellas, GSK, Edwards, AMV and J&J.

Model N recognized AstraZeneca with the Revenue Management Visionary Award, which recognizes a company that has demonstrated leadership and innovation in expanding the horizon of Revenue Management. AstraZeneca implemented out-of-the-box revenue cloud for pharma without customization and was recognized for 3 tremendous achievements: first, they are the first top 25 pharma companies to implement Revenue Management for their entire U.S. business in the Model N cloud; second, they are also the first top 25 pharma companies to implement both their U.S. business and their global business using Global Price Management in the cloud; and third, they drove innovation by serving as the light of customers for 2 applications: accruals management and contract life cycle management.

AstraZeneca's commitment to the cloud and discipline to 0 customization allowed them to drive top line growth and reduce contract complexity and IT costs. We are not the first one to recognize them for their vision and tremendous value achieved by this award. The project, known as Project Fusion, has already won the very prestigious AstraZeneca CEO's Award for the best project of 2016.

We recognized Novartis with the Revenue Management Globalization Award, which recognizes a company who has set a vision and a strategy for global Revenue Management. Novartis set the global Revenue Management strategy across 3 business units in more than 100 countries and delivered on this vision with precise execution, implementing Global Price Management. Like AstraZeneca, they too have won several awards across business units and senior management team for the best project execution at this organization.

Finally, we recognized Astellas with the Revenue Management as a Service RMS Award, which recognizes a company that has excelled in adoption of Revenue Management as a Service. Astellas, a top 25 pharma company, was recognized for their position to RMS with revenue claims for pharma.

All 3 winners are large pharmaceutical companies. Each started the journey in a different place, and all 3 are now levering the power of the cloud to drive the next flows of competitive advantage for their company with revenue cloud driving growth, with using growth in enabling the business with strategic agility.

The final testament to the momentum of the company were the purchasing decision that customers made during Q2 fiscal year '17. For example, J&J signed the second part of a major deal to implement revenue cloud for pharma in their pharmaceutical business. The J&J pharma business will run revenue cloud for pharma for both the global and U.S. business, for both commercial and government business, utilizing transactional and analytics modules.

Teva, Pfizer and Novartis, among others, signed new subscriptions for their U.S. business. New customers include, Otsuka, [Armien] and Axela. Otsuka joined as Model N customers through a BPO arrangement with one of Model N partners. With the addition of Otsuka, Model N now has over top 25 pharmaceutical companies as customers.

We had an outstanding start for our combined journey, which is a testament to the strategic value of the acquisition. Specifically, we are accelerating Model N growth and the transition to Revenue Management in the cloud, realizing cost synergies to accelerate our time to profitability and expanding our market opportunity through more comprehensive set of solutions, which we can drive our land and expand strategy.

I want now to shift gears from our Life Sciences business and discuss our high tech business. Intel signed a subscription for our revenue cloud for high tech, following the go-live of their Internet of All Things or IoT division. It has subscribed to our revenue cloud for high tech. Intel has been a long-term customer of our Channel Data Management solution, which is used extensively to collect, claim and enhance point-of-sale and inventory data from hundreds of channels.

Recently, they have completed the implementation of Model N Deal Management, Deal Intelligence and Rebate Management solutions. This global technology leader will leverage our revenue cloud to transform their revenue management processes into a strategic end-to-end process, specifically, transforming disconnected processes in pricing, quoting, rebate claims and price protection into a single, optimized business process.

Before wrapping up, as you saw in the press release, we appointed David Barter as our new CFO. Mark has decided to take a new opportunity in New Zealand and will relocate to Auckland at the beginning of June. I would like to thank Mark for his many contributions to Model N over the years. Mark leaves the business in great shape as demonstrated by our results. In addition, Mark built a strong global finance organization. We appreciate his staying on through the end of the month to ensure smooth transition and wish him the very best in his new adventure.

While we are sad to see Mark go, we are thrilled to have David Barter join as our new CFO beginning this Wednesday. Some of you may know David from his years as VP of Finance at Guidewire Software. While at Guidewire, David was responsible for worldwide finance, accounting and tax operations. In addition, David's experience at Microsoft, GE and The Boston Consulting Group is a tremendous asset for Model N as we scale our business and take it to the next level. We welcome David to Model N.

We are also very pleased that Baljit Dail has joined the board. Bal has a meaningful and relevant experience leading global enterprises, most recently as the Chairman and CEO of JDA and previously at Aon as well as a McKinsey partner. We are committed to continue to maintain a strong, independent Board of Directors. David, would you like to say a few words?

Thank you, Zack. I am thrilled to have this tremendous opportunity to join Model N at such an exciting time. Model N has established itself as the leader in Revenue Management, delivering mission-critical solutions to enterprises around the globe. I'm greatly looking forward to working with the team to drive growth, scale the business and achieve the company's operational and financial objectives.

Thank you, David. In closing, I am encouraged by the results of Q2 fiscal year '17 and am excited about the rest of fiscal year '17 and beyond. We feel confident in our ability to deliver both the top line and bottom line, and in particular, turn Model N into positive adjusted EBITDA in Q4 fiscal year '17. We see a business momentum that is starting to shape a strong fiscal year '18.

Let me turn the call over to Mark to discuss our financial results and guidance. Mark?

Thank you, Zack. I want to thank you, the Model N Board of Directors and all of the great members of the Model N team for my time here. I strongly believe in Model N's strategy and our ability to execute to that strategy. I know the company is in very good hands with the addition of David to the team. I am very proud of my time at Model N and what we have accomplished.

Now to the results. I would like to remind you that our second quarter results and the guidance of Q3 and fiscal year '17 include the acquisition of Revitas, which closed on January 5, 2017, at the start of our second fiscal quarter. I want to reiterate some of the points that Zack highlighted. First, this is a very solid quarter for Model N. We demonstrated strong results beating both top and bottom line.

Second, we added Q2 with a strong balance sheet with record levels of AR and deferred revenue. Third, the transition of Revitas customers, partners and employees is largely complete, and we are operating effectively as one Model N.

Finally, the cost savings initiatives we identified are on track, and we expect to exit our Q3 at the full synergy run rate. As a reminder, we guided to total annualized cost synergies from the combination of Model N and Revitas to be between $11 million and $13 million. We now expect those synergies to come in at the high end of that range.

The second quarter marked a strong start to the year, beating our guided metrics. We believe we are well positioned to deliver strong financial performance in fiscal year 2017. GAAP revenues prior to deferred revenue impact from the purchase accounting adjustment were $35.4 million, an increase from $26.1 million in total revenue in the year-ago period and well above our range prior to the purchase accounting adjustment of $33.5 million to $34 million. Total GAAP revenues for the second quarter were $33.3 million. Going forward, we report only on GAAP revenue numbers.

Within total GAAP revenues, prior to the deferred revenue impact from the purchase accounting adjustment, license and implementation revenues were $6 million and SaaS and maintenance revenues were $29.4 million for the quarter. Q2 2017 represented a 39% increase year-over-year in SaaS and maintenance revenue dollars from the same period last year.

The mix of revenues in Q2 was 83% SaaS and maintenance versus 17% license and implementation. This is the highest percentage of SaaS and maintenance revenue in Model N's history, and we are pleased with our ongoing progress, especially as we transition the Revitas business. The company remains committed to drive the business towards 100% SaaS and maintenance revenues, and we continue to make progress towards this goal.

Before I move on to profit and loss items, I want to remind you that my commentary would be focused on non-GAAP results. A reconciliation of non-GAAP to GAAP results is provided with the earnings press release issued early today.

Non-GAAP gross profit for the second quarter was $20.4 million compared to $13.1 million in the second quarter of fiscal 2016. Gross profit in this quarter included the impact of roughly $290,000 from the amortization of capitalized software that began upon the launch of our CPQ product. Overall, non-GAAP gross margin in the quarter was 58%, a significant increase compared to 50% in Q2 of last year.

We continue to focus on the improvement of gross margin, specifically on the SaaS and maintenance lines. We have made good progress during the second quarter as we continued to drive a higher mix of overall SaaS subscription contribution. We would expect our non-GAAP gross margin to continue at or near the 58% we achieved in Q2. We do expect some quarter-to-quarter variability depending on the revenue of mix and timing of projects.

Total operating expense was $25.8 million in Q2 fiscal year 2017 compared to $18.7 million in the second quarter fiscal '16. The $7.1 million year-over-year increase was due primarily to the Revitas acquisition. Operating loss for the period was $5.3 million compared to a loss of $5.7 million in Q2 of last year and better than our guidance of an operating loss of $6 million to $6.5 million.

During Q2, we executed on most of the synergies from the Revitas acquisition and internal cost-containment measures that we discussed with you previously and continue to believe we will exit our Q3 at the full synergy run rate. As stated previously, we expect our annualized synergies to be at the high end of the $11 million to $13 million guidance we shared on our previous call.

Net loss in the second quarter was $7 million compared with a net loss of $5.7 million in the second quarter of fiscal '16. The difference is driven by interest expense associated with the acquisition. We continue to work on our pathway to profitability at an accelerated rate.

On a GAAP basis, operating loss for the period was $15 million compared to a loss of $8.9 million of Q2 of last year. GAAP net loss in the second quarter was $12.5 million compared to a GAAP net loss of $8.9 million in the second quarter of fiscal 2016. We produced a non-GAAP net loss per share of $0.25 based on a share count of 28.5 million shares compared to a non-GAAP net loss per share of $0.21 based on a share count of 27.2 million shares in the second quarter of last year. This was better than our guidance of net loss of $0.28 to $0.26 per share. GAAP loss per share was $0.44 in the second quarter compared to $0.33 in the second quarter of fiscal 2016.

Adjusted EBITDA for the second quarter was negative $4.4 million compared to a negative $4.5 million in the year-ago period. To reiterate our guidance that we expect to be adjusted EBITDA positive in Q4 '17, and we continue to improve on our profitability as we enter fiscal 2018.

We ended the second quarter with $53.7 million of cash and cash equivalents, up from $52.4 million at the end of the first quarter. The company had improved invoicing and collection efforts in Q2. At the end of the second quarter, our accounts receivable balance was $27 million and our deferred revenue was $47.4 million. The total deferred revenue balance included a reduction in the purchase accounting of $9.6 million.

For the second quarter, cash flow used by operations was $5.4 million, which after adding CapEx of $27,000 and capitalized software of $11,000, produced a negative free cash flow of $5.4 million. This included $3.1 million in cash outflow related to the acquisition of Revitas. This compared to cash used by operations of $900,000 in the second quarter of last year, which after adding approximately $700,000 of CapEx and capitalized software of $100,000, using negative free cash flow of $1.7 million. We remain focused on cash and reiterate our guidance of an ending cash balance at September 30, 2017, of $50 million and $52 million as we have previously shared.

Moving on, let me now outline our guidance for the third quarter of fiscal '17 as well as our guidance for the full 2017. As a reminder, our guidance includes the acquisition of Revitas. Please note, as stated above, we will no longer provide the GAAP revenue before the purchase accounting adjustment. But for the remainder of fiscal '17, we will provide GAAP revenue guidance and the corresponding purchase accounting adjustments.

For our third quarter ending June 30, 2017, we expect total GAAP revenues to range from $33.5 million to $33.8 million, which includes an estimated reduction from the purchase accounting adjustment of approximately $1.9 million. Non-GAAP loss from operations is expected to be in the range of $3.5 million to $3 million. This would lead to a non-GAAP net loss per share in the range of $0.19 to $0.17 based on a weighted average share count of 28.8 million shares and assuming approximately $1.5 million of net interest expense.

For the full fiscal year 2017, we now expect total GAAP revenues to range from $129.4 million to $130 million. This includes an estimated reduction from the purchase accounting adjustment of approximately $5.1 million. We previously guided to revenue before the purchase accounting adjustment of $130 million to $134 million. This revised guidance would represent $134.5 million to $135.1 million revenue before the purchase accounting adjustment.

We continue to expect our annualized recurring revenue or ARR to be between $46 million and $48 million. This represents a 31% to 36% year-over-year growth. Non-GAAP loss from operations is expected to be in the range of $14.5 million to $14 million, an improvement compared to our prior guidance of a loss of $16 million to $15 million.

Non-GAAP net loss per share is expected to be in the range of $0.68 to $0.66 based on a weighted average share count of 28.7 million shares compared to our prior guidance of $0.69 to $0.66. We continue to believe that the combined organization will accelerate its pace towards profitability and remains on track to be adjusted EBITDA positive in Q4 2017.

In fiscal year 2017, Model N remains committed to 3 key financial metrics: number one, overall revenue growth; number two, driving towards a 100% SaaS and maintenance business; and three, accelerating our path to sustained profitability and operating cash flow. We made very good progress in the second quarter and we continue to drive towards these 3 goals.

With that, let me turn the call over to the operator for questions.

(Operator Instructions) Our first question comes from Brian Peterson from Raymond James.

So Mark, one for you. Just wanted to understand the mechanics of the gross margin. Really strong this quarter, 61%. Were there any onetime items that drove that upside? Because I'm trying to understand why that would go back down to 58% in the back half of the year.

So the gross margins, Brian, non-GAAP gross margins were actually 58% at the aggregate level. And I mentioned that we expect to continue on that number or improve on that as we move into the future. So I'm not sure where the 61% came from.

Got it, okay. And on the Revitas road map, just trying to bifurcate that from the existing Model N road map. I know you're going to continue to support Flex for the foreseeable future. How R&D-intensive is that? And are there big road -- like road maps or milestones that are coming up that we should be aware of?

Yes, this is kind of for Zack. Thank you for the question. So the way that we release our products, we release the product on a seasonal releases, which really happen in a specific time in the summer, in the winter and in the spring. And then this is basically an iterative process, where every 4 months, we give additional functionality and enhancement to our customers. As I mentioned in the call, we unified the engineering and the release schedule process, and now we released the entire product line at the same date. We do not have any major milestones kind of along the way. And what you see with the Revitas product line, it's much more of a gradual way of moving the product to kind of -- to the cloud, where every release, we give the customers more features and more kind of capabilities. So there's no major milestone. It's more of a gradual transition in this direction.

Brian, it's Mark again. In reference to your question on gross margins, I thought maybe you were referring to our line 2 gross margin, which was 63%, which was also a significant improvement quarter-over-quarter. And as we've mentioned in the past, we do expect to see continued improvement on that. The acquisition was also accretive to our line 2 gross margin.

(Operator Instructions)

And our next question comes from Chad Bennett from Craig-Hallum.

First, Mark, just want to say best of luck on your new endeavor. I've enjoyed working with you past couple of years and stay in touch, I guess.

Chad, appreciate that very much. I liked working with you as well. Thank you.

And welcome, David.

Thank you very much.

So just a couple of questions for me. Mark, at your Investor Day a month or 2 ago, you talked about SaaS subscription revenue as a percentage of overall revenue for this year being in the 36% to 38% range, I assume we're still on track with that thinking.

So the -- I think what you're speaking to, Chad, is that the growth in the ARR year-over-year is expected to be 31% to 36% year-over-year, and that would put us in the range of $46 million to $48 million. And yes, we do expect to be in that range. As far as percentage of SaaS and maintenance revenue as far as the total percentage of revenue, as we highlighted earlier on the call, we were actually 83% for this quarter, which is a record high for Model N.

Okay. All right. And then can you kind of speak to -- going back to the gross margin question on line 2, it was a pretty noticeable improvement sequentially. Is that a function of just layering on more maintenance revenue that's obviously highly profitable? Or can you give us any color to how much kind of margin improvement you've seen on the SaaS business, whether it's consolidated to data centers or moving to AWS or kind of what the improvement in the SaaS business has been there?

Yes, good question, Chad. So it's really 2 factors. One factor, obviously, is the acquisition of Revitas and the support and maintenance that has been overlaid on that. As I mentioned previously, they were running that gross margin in the mid- to high 80s, very similar to the profile that we have. The second item on there is the fact that on the cloud side, as we move through this process and we expect to continue to see this growth as we move ahead, we will see improved gross margins on the cloud operation side. So as we move ahead and begin the migration of customer as I mentioned previously and at the Analyst Day, we do expect to see improvements quarter-over-quarter on our cloud operation's gross margin, and those 2 factors will continue to lift the SaaS and maintenance or line 2 gross margins.

Got it. And last one for me probably for Mark again. The deferred rev dollar amount, I think short-term deferred was about $46.5 million. And maybe it's in a filing, I haven't seen it, but how much of that is related to Revitas?

We did not break that out, but you'll see that the deferred revenue haircut that we took was $9.6 million. So basically, if you add the $9.6 million to the $46 million, you get a view of what the deferred revenue would have been with the combined entities. Obviously, we have the improvement deferred revenue quarter-over-quarter based on our strong performance as well.

(Operator Instructions) Our next question comes from Patrick Walravens from JMP Securities.

This is actually Natasha on for Pat. So how would you think about 2018 and what key points would you make?

Natasha, so I'll go first and Zack can add color to that. So we haven't given any financial color yet on 2018. Our goal would be, obviously, to do that at the end of our Q4. We just completed our Q2 so we have 2 quarters of performance to go. But I think as reiteration of some of the commentary and the performance on a year-to-date basis, we feel very good about our approach into 2018. We expect to continue to see growth in revenue. We expect to see the transformation of the business continue towards our SaaS and maintenance line. As we mentioned earlier, we're at the highest point we've ever been in company history. We expect to see our gross margin, which is roughly 300 to 500 basis points above what it had run the last 2 quarters. We expect that to continue to increase as we move into the future as well. And as far as the overall acquisition with Revitas, I personally feel that it's gone extremely well, and we expect to see continued gains on the synergies as we spoke about in the call. So I think overall, a very good picture for what fiscal year '18 is going to look like, and then we have to close out, obviously, the last 2 quarters to give the financial impact.

This concludes the question-and-answer session. I'd like to turn the floor back over to management for any closing comments.

Thank you, all, for joining the call today. We are very excited about the strategic progress of the company. We had 2 extremely strong quarters, and we have very strong visibility to the rest of the fiscal year and to shaping fiscal year '18. We believe that the acquisition of Revitas is going in the very good direction and is really a strategic opportunity for us as a company. And really appreciate everybody joining us at the conference call today. Thank you very much.

Thank you. This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.